Forming a Non-Profit
Forming a Non-Profit 501(c)(3) Federally Tax Exempt Corporation in Pennsylvania to Pursue Environmental or Citizen Activism
Prepared by the Community Environmental Legal Defense Fund (CELDF)
Thomas Alan Linzey, Esq.
Note: The provision of the materials within this Manual is for informational purposes only, and should not be deemed to be legal advice. Organizations are urged to retain legal counsel if they have questions concerning any aspect of the incorporation and 501(c)(3) process.
Table of Contents
Why Form a 501(c)(3) Corporation?
Additional Help Guides Available
Incorporating in Pennsylvania as a Non-Profit Corporation
Post-Incorporation: Choosing a Board of Directors, Drafting Bylaws
Filing for Federal Tax-Exempt, 501(c)(3) Status
Annual Filing Requirements with the State and Federal Government
Maintaining Charitable Status as a 501(c)(3)
Hooking into Pennsylvania's Non-Profit Environmental Network
I. Why Form a 501(c)(3) Corporation?
There are several main reasons why organizations decide to incorporate and become 501(c)(3) federally non-profit corporations. These are:
* Limited Liability - when acting as an unincorporated association or as individuals pursuing a common goal, each person may be individually liable if sued by another person or organization. By incorporating, limited liability is conferred, and thus, only the assets of the corporation can be reached by a suing party.
* Tax Deductible Donations - after attaining 501(c)(3) status, the organization can attract donors that wish their donations to be tax deductible. Under current IRS regulations, donors can deduct an amount up to 50% of their adjusted gross income on their annual tax return. Corporations may also deduct up to 10% of their annual taxable income. See IRS Publications 526, 561, and 535.
* Eligibility for Funding - almost all local and state government agencies; and privately operating foundations require funded organizations to have 501(c)(3) status. A routine part of funding applications is a request for an IRS determination letter as proof that the organization has attained 501(c)(3) status.
* Other Advantages include (1) ability to use Public Service Announcements on local radio and television stations; (2) ability to use discounted space from internet service providers; (3) lower postal rates on third class bulk mailings, and (4) ability to use interns from local universities.
The main disadvantages to forming a 501(c)(3) non-profit corporation are: (1) additional paperwork for maintaining corporate records, tax correspondence, and annual IRS reports, (2) payment of incorporation costs and fees, and (3) the time and energy necessary to maintain the corporation.
I(a). Additional Help Guides Available
There are various in-depth help guides available for determining whether your organization should establish a 501(c)(3) corporation and the step by step processes by which to form a non-profit corporation. The most helpful guides include:
Anthony Mancuso, Esq., How to Form a Nonprofit Corporation in All 50 States: Qualify for Federal 501(c)(3) Tax Status, Nolo Press (1993).
[Available on the Barnes and Noble web page - http://www.barnesandnoble.com for around $35.00]
The IRS also produces several publications to assist organizations that are seeking to become 501(c)(3) non-profit corporations. These can be obtained by calling 1-800-TAX-FORM and are offered free of charge:
Publication 557: Tax-Exempt Status for Your Organization
Publication 578: Tax Information for Private Foundations and Foundation Managers
Another helpful webpage exists at http://www.form1023help.com, which has been created by a former IRS Tax Exempt Organizations Specialist, to assist newly formed nonprofit organizations with navigation of the 1023 Application.
II. Incorporation in Pennsylvania as a Non-Profit Corporation
The first step on the road to attaining status as a federally tax exempt, 501(c)(3) non-profit corporation is to incorporate in Pennsylvania. Incorporation in Pennsylvania is a fairly simple exercise, and includes the use of boilerplate articles of incorporation that can be customized by your organization, filing with the state, and paying a filing fee of $125.
Note: If the organization will be applying for federal tax-exempt recognition under section 501(c)(3) of the Tax Code, you should call the IRS at 1-800-TAX-FORM prior to incorporating at the state level (calling now will save time later). When calling, you need to ask the IRS for "Form 1023.” The Form is also downloadable by accessing the IRS webpage at http://www.irs.gov.
The articles of incorporation filed by your organization are known as its "charter". Corporations chartered in Pennsylvania are known as "domestic" corporations, while corporations chartered outside of Pennsylvania that are allowed to do business in the state are known as "foreign" corporations.
The articles of incorporation will begin the duration of the corporation when they are approved by the state. When sitting down to draft your articles of incorporation, it would appear that you have your choice of a "fill in the blank" form provided by the State, or more extensive articles as given below. DO NOT USE THE FORMS PROVIDED BY THE STATE. Although it is certainly easier to use the State's forms, it will cause problems later when the Internal Revenue Service (IRS) reviews your forms to look for certain language. Many other nonprofits have been forced to amend these articles in response to IRS review, thus losing many valuable weeks. It is advised that you use the boilerplate provided below - which is also the boilerplate used by the Internal Revenue Service as a suggested format.
There are two other technical requirements, explained later in this section, which also must be completed in Pennsylvania in addition to filing the articles in order to qualify you for incorporation.
Sample Articles of Incorporation
ARTICLES OF INCORPORATION FOR
Middle Spring Watershed Association, Inc.
Articles of Incorporation for Middle Spring Watershed Association, Inc.
Articles of Incorporation of the undersigned, a majority of whom are citizens of the United States, desiring to form a non-profit corporation under the Pennsylvania Non-Profit Corporation Law of 1988, 15 Pa.C.S.A. §5301, do hereby certify:
Section 1.01. Name. The name of the Corporation is “Middle Spring Watershed Association, Inc.”
Purpose and Powers
Section 2.01. Purpose. The purpose for which the Corporation is formed is the transaction of any or all lawful business for which non-profit corporations may be incorporated under the laws of Pennsylvania. The specific purpose of this corporation shall be to educate the general public about the importance of protecting and restoring the Branch and Middle Spring Creek watersheds, and to protect and restore those watersheds.
Section 2.02. Powers. The Corporation shall have the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, subject to any limitations or restrictions imposed by applicable law or these Articles.
Section 2.03. Purpose. Said Corporation is organized exclusively for charitable, educational, religious, or scientific purposes, within the meaning of §501(c)(3) of the Internal Revenue Code (or corresponding section of any future Federal tax code), including for such purposes, the making of distributions to organizations that qualify as exempt organizations under §501(c)(3) of the Internal Revenue Code, or the corresponding section of any future Federal tax code.
Registered Office and Registered Agent
Section 3.01. Registered Office and Agent. The name of the registered agent and the street address of the registered office of the Corporation are as follows:
____________________________ (must be a street address, not a P.O. Box)
Section 4.01. Number and Qualification. The number of directors of the Corporation shall be specified, from time to time, by the Code of Bylaws, which number may be increased or decreased from time to time by amendment of the Bylaws. At no time shall there be less than three (3) Directors for the Corporation.
Section 5.01. Name and Address. The name and address of the Incorporator of the Corporation are as follows:
Code of Bylaws; Indemnification; Amendments of Articles
Section 6.01. Code of Bylaws. The Board of Directors of the Corporation shall have the power to make, alter, amend, or repeal the Bylaws of the Corporation, subject to the restriction that a majority vote of the Directors is necessary to take these actions.
Section 6.02. Indemnification. The Corporation shall indemnify a director or officer of the Corporation who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director or officer was a party because the director or officer is or was a director or officer of the Corporation, against reasonable expenses incurred by the director or officer in connection with the proceeding.
Limitations on Activities
Section 7.01. Limitations. No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to, its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article Two hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of, or in opposition to, any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on by (a) a corporation exempt from federal income tax under §501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) a corporation, contributions to which are deductible under §170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
Section 8.01. Dissolution. Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of §501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by a Court of competent jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.
Section 9.01. Non-Stock Basis. This corporation shall be organized upon a nonstock basis.
Section 10.01. This corporation is to have perpetual existence.
Executed this ______Day of ___________, 2006
You will notice that there are spaces for the listing of an incorporator and for a registered agent. An incorporator is the individual who signs and submits the articles of incorporation to the State. Once incorporated, the incorporator has the power and authority to appoint the initial Board of Directors for the corporation. The registered agent is simply someone designated within the State who is willing to receive a complaint against the corporation if the corporation is sued, and notices sent by the State to the corporation. Many times, the incorporator will be the same individual as the registered agent.
Choosing a Corporate Name: The name of the corporation must include the word "incorporated", "corporation", "company", or an abbreviation of those words. The corporate name may also use "association", "fund" or "syndicate" in its name. Primarily, the concern here is that individuals dealing with the corporation must understand that they are dealing with a limited liability organization.
Cost: There is a $125 fee for incorporating in Pennsylvania as a non-profit corporation. Time: Usually, it takes about three weeks' time to receive notice that you've been incorporated.
Other Technical Requirements: Along with the filing of the articles of incorporation (instructions below), you must do the following:
1. Submit a "docketing statement" with your articles. This Form is provided to you by the Department of State or can be downloaded from the Pennsylvania Department of State's website at http://www.dos.state.pa.us/corps/. Once on the webpage, look for "Forms", then scroll all the way to the bottom of the Forms categories to find the Docketing Statement for a "New Entity.” The docketing statement covers basic information about the registered office of the corporation, brief description of the organization, etc. The Docketing Statement must be filed with the Articles of Incorporation. Otherwise, your filing will be returned and you'll have to resubmit. The Articles and Docketing Statement must be submitted, with the incorporation fee, to "Pennsylvania Department of State, Corporations Bureau, Room 308, North Office Building, P.O. Box 8722, Harrisburg, Pennsylvania 17105-8722."
2. After filing your articles, you must publish notice of the submission of the incorporation papers in two newspapers of general circulation on the same day. If your county has a legal newspaper, you must publish in both the legal newspaper and one newspaper of general circulation on the same day. This is not as complicated as it initially sounds - what is required is a three to four line advertisement in the Legal Classifieds section of the newspaper. It will usually cost between $12 - $25 per paper, depending upon how large the circulation is for each. The Notice will simply read that "Middle Spring Watershed Association, Inc. has filed to become a Pennsylvania Non-Profit Corporation under the Non-Profit Corporation Law of 1988, 15 Pa.C.S.A. §5301." The newspaper will send you a copy of the ad and an affidavit that proves it was published. These should be kept with your corporate records, but does not need to be submitted to the Department of State.
Within about three weeks' time, you should have a stamped, filed, copy of your articles of incorporation. Congratulations! You are now a state recognized, nonprofit corporation.
III. Post-Incorporation: Choosing a Board of Directors, Drafting Bylaws
After you've received notice that the State has filed your articles of incorporation, your organization will begin to draft Bylaws.
Bylaws are the rules under which the corporation will operate. In the Bylaws, the organization will make crucial decisions, such as how many directors to have, how often meetings will be held, quorums for decisionmaking, more specific purposes of the organization, how amendments will be made to the bylaws, etc. It basically provides a map of how the corporation will operate during its existence.
Pennsylvania law requires that the corporation have at least one director on the Board of Directors if the number is specified in the Bylaws. If not specified in the Bylaws, the state requires at least three directors on the Board. Directors must be over 21 years of age (statute uses term of "full age" - which means capable of contracting), but do not have to be residents of Pennsylvania.
After incorporation, it is the duty of the incorporator to hold a meeting, at which the Directors are chosen, and a set of bylaws are adopted by the Directors.
Below is a very basic set of bylaws that can be used as a starting point for your organization. If more complex bylaws are sought by the corporation, you can contact the Fund at (717) 709-0457. We've made a conscious decision to keep our sample bylaws relatively short, as we believe that most organizational bylaws are bloated and overdrafted. There are, however, several key questions that must be addressed by your Bylaws. These include:
* Number of Directors and specifics concerning how often Directors are to meet, length of term of Directors, and how Directors are chosen;
* Officers of the corporation. In Pennsylvania, corporations must have a president, secretary, and treasurer, although state law allows all three offices to be held by the same person. Other considerations include powers of the officers, whether they will be compensated for their work, annual reports that must be filed, etc.;
* Amendments to the bylaws; how amendments are made; what type of vote is required for amendment;
* Indemnity provisions, which require the corporation to cover the legal costs if a Director is sued for actions taken on behalf of the corporation.
Below is a model copy of some very basic bylaws that can be used to customize bylaws for the corporation:
ByLaws of Green Research, Inc.
Section 1. Principal Office. The principal office of the corporation is located in ________________County, State of ____________.
Section 2. Other Offices. The corporation may also have offices at such other places, within or without its state of incorporation, where it is qualified to do business, as its business and activities may require, and as the board of directors may, from time to time, designate.
Section 1. IRC Section 501(c)(3) Purposes. This corporation is organized exclusively for one or more of the purposes as specified in Section 501(c)(3) of the Internal Revenue Code, including for such purposes, the making of distributions to organizations that qualify as exempt organizations under Section 501(c)(3) of the Internal Revenue Code.
Section 2. Specific Objectives and Purposes. The specific objectives and purposes of this corporation shall be: ________________.
Section 1. Number. The corporation shall have ____directors and collectively they shall be known as the Board of Directors.
Section 2. Powers. Subject to the provisions of the laws of this state and any limitations in the Articles of Incorporation and these Bylaws relating to action required or permitted to be taken or approved by the members, if any, of this corporation, the activities and affairs of this corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the Board of Directors.
Section 3. Duties. It shall be the duty of the directors to: (a) Perform any and all duties imposed on them collectively or individually by law, by the Articles of Incorporation, or by these Bylaws; (b) Appoint and remove, employ, supervise, and discharge, prescribe the duties and fix the compensation, if any, of all officers, agents, and employees of the corporation; (c) Meet at such times and places as required by these Bylaws.
Section 4. Term of Office. Each director shall hold office for a period of ______ and until his or her successor is elected and qualifies.
Section 5. Compensation. Directors shall serve without compensation except that a reasonable fee may be paid to directors for attending regular and special meetings of the Board.
Section 6. Regular Meetings. Regular meetings of Directors shall be held on _________ at __________(time).
If this corporation makes no provision for members, then, at the regular meeting of directors held on __________, directors shall be elected by the Board of Directors. Voting for the election of directors shall be by written ballot. Each director shall cast one vote per candidate, and may vote for as many candidates as the number of candidates to be elected to the Board. The candidates receiving the highest number of votes up to the number of directors to be elected shall be elected to serve on the Board.
Section 7. Quorum for Meetings. A quorum shall consist of __________ of the members of the Board of Directors.
Section 8. Majority Action as Board Action. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors, unless the Articles of Incorporation, these Bylaws, or provisions of law require a greater percentage or different voting rules for approval of a matter by the board.
Section 9. Non-Liability of Directors. The directors shall not be personally liable for the debts, liabilities, or other obligations of the corporation.
Section 10. Indemnification by Corporation of Directors and Officers. The directors and officers of the corporation shall be indemnified by the corporation to the fullest extent permissible under the laws of this state.
Section 1. Designation of Officers. The officers of the corporation shall be a President, a Vice President, a Secretary, and a Treasurer. The corporation may also have a Chairperson of the Board, one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers, and other such officers with such titles as may be determined from time to time by the Board of Directors.
Section 2. Qualifications. Any person may serve as officer of this corporation.
Section 3. Election and Term of Office. Officers shall be elected by the Board of Directors, at any time, and each officer shall hold office until he or she resigns or is removed.
Section 4. Removal and Resignation. Any officer may be removed, either with or without cause, by the Board of Directors, at any time. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or Secretary of the corporation.
Section 5. Duties of Officers. (To Be Customized).
Section 6. Compensation. The salaries of the officers, if any, shall be fixed from time to time by resolution of the Board of Directors. In all cases, any salaries received by the officers of this corporation shall be reasonable and given in return for services actually rendered to or for the corporation.
Section 1. Committees. The corporation shall have committees as may from time to time be designated by resolution of the Board of Directors. These committees may consist of persons who are not also members of the board and shall act in an advisory capacity to the board.
Section 2. Meetings and Action of Committees. Meetings and action of committees shall be governed by and held in accordance with the provisions of these Bylaws concerning meetings of the Board of Directors.
Section 1. Maintenance of Corporate Records. The corporation shall keep at its principal office:
(a) Minutes of all meetings of directors and committees of the Board;
(b) A conformed copy of the corporation's Articles of Incorporation and Bylaws;
(c) Adequate and correct books and records of its corporate bank account(s);
(d) Copies of all correspondence and filings with the IRS.
IRC 501(c)(3) Tax Exemption Provisions
Section 1. Limitation on Activities. No substantial part of the activities of this corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and this corporation shall not participate in, or intervene in, any political campaign on behalf of, or in opposition to, any candidate for public office.
Notwithstanding any other provisions of these Bylaws, this corporation shall not carry on any activities not permitted to be carried on (a) by a corporation exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code, or (b) by a corporation, contributions to which are deductible under Section 170(c)(2) of the Internal Revenue Code.
Section 2. Prohibition Against Private Inurement. No part of the net earnings of this corporation shall inure to the benefit of, or be distributable to, its members, directors or trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes of this corporation.
Section 3. Distribution of Assets. Upon the dissolution of this corporation, its assets remaining after payment, or provision for payment, of all debts and liabilities of this corporation shall be distributed for one or more exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code or shall be distributed to the federal government, or to a state or local government, for a public purpose. Such distribution shall be made in accordance with all applicable provisions of the laws of this state.
Amendment of Bylaws
Section 1. Amendment. These bylaws may be altered, amended, or repealed and new Bylaws adopted by approval of the Board of Directors.
Construction and Terms
If there is any conflict between the provisions of these Bylaws and the Articles of Incorporation of this corporation, the provisions of the Articles of Incorporation shall govern.
Should any of the provisions or portions of these Bylaws be held unenforceable or invalid for any reason, the remaining provisions and portions of these Bylaws shall be unaffected by such holding.
All references in these Bylaws to a section or sections of the Internal Revenue Code shall be to such sections of the Internal Revenue Code of 1986 as amended from time to time, or to corresponding provisions of any future federal tax code.
Adoption of Bylaws
We, the undersigned, are all of the initial directors or incorporators of this corporation, and we consent to, and hereby do, adopt the foregoing Bylaws, consisting of _______preceding pages, as the Bylaws of this corporation.
Signatures of initial Board Members or Incorporators
Organizations are encouraged to customize these Bylaws to their needs as an organization in a particular locality. Customized Bylaws that organizations wish to have reviewed by an attorney, should be submitted to the Fund either by e-mail (firstname.lastname@example.org) or by fax - (717) 709-0263. The Fund can usually give an answer or suggest amendments or changes to the Bylaws on a forty-eight hour turnaround schedule.
IV. Finalizing the Corporate Structure: Holding an Organizational Board Meeting
To finalize your nonprofit corporate structure, you must hold a Board of Directors meeting at which certain preliminary affairs will be voted upon by the Board and officers elected.
First, you'll need to have the Board of Directors sign a Consent to Waiver of Notice Form. This is simply a signed statement by Board members that they waive the notice required by their Bylaws for the holding of the first Board meeting.
Here's a sample form:
Waiver of Notice and Consent to Holding of First Meeting of
Board of Directors of the Eastern Cougar Foundation, Inc.
We, the undersigned, being all the directors of the Eastern Cougar Foundation, hereby waive notice of the first meeting of the Board of Directors of the corporation and consent to the holding of said meeting on Sunday, February 14, 1999; and consent to the transaction of any and all business by the directors of the meeting; including, without limitation, the adoption of Bylaws, the election of officers and the selection of the place where the corporation's bank accounts will be maintained.
Dated: this _____________Day of February, 1999
Here's a sample resolution for the first organizational Board meeting. Additional matters that must be dealt with by the Board at this meeting should be customized into this sample form:
Minutes of the First Meeting of the Board of Directors for
The Eastern Cougar Foundation, Inc.
The Board of Directors of the Eastern Cougar Foundation, Inc. held its first meeting on the ______Day of _______, 1999. The following directors, constituting a quorum of the full board, were present at the meeting:
(1) Donald Linzey
(2) Thomas Linzey
(3) Mark Jenkins
No directors were absent.
On motion and by unanimous vote, Thomas Linzey was elected temporary Chairperson and then presided over the meeting. Donald Linzey was elected temporary Secretary of the meeting.
The Chairperson announced that the meeting was held pursuant to written waiver of notice signed by each of the directors. Upon a motion duly made, seconded, and unanimously carried, the waiver was made a part of the records of the meeting. It now precedes the minutes of this meeting in the corporate records book.
Articles of Incorporation
The Chairperson announced that the Articles of Incorporation were filed with the office of the Secretary of State of West Virginia.
RESOLVED, that the Secretary of this Corporation is directed to see that a copy of the Articles of Incorporation, certified by the Secretary of State, is kept at the corporation's principal office.
There was then presented to the meeting for adoption a proposed set of Bylaws of the corporation. The Bylaws were considered and discussed and, on motion duly made and seconded, it was unanimously
RESOLVED, that the Bylaws presented to this meeting be and hereby are adopted as the Bylaws of the corporation;
RESOLVED, that the Secretary of this corporation is directed to see that a copy of the Bylaws is kept at the corporation's principal office.
Election of Officers
The Chairperson then announced that the next item of business was the election of officers. Upon motion, the following persons were unanimously elected to the offices shown after their names:
Todd Lester, President
Chris Bolgiano, Vice President
Jaquetta Lester, Secretary and Treasurer
The Board of the Directors agreed that the President shall preside at all meetings as Chairperson of each future meeting and that the Secretary of the Corporation shall act as Secretary at each future meeting.
After discussion as to the exact location of the corporation's principal office for the transaction of business in the county named in the Bylaws, upon motion duly made and seconded, it was
RESOLVED, that the principal office of this corporation shall be located at: P.O. Box 74, North Springs, West Virginia 24869
Upon motion duly made and seconded, it was
RESOLVED, that the funds of this corporation shall be deposited with a financial institution chosen by the President, and the Treasurer is hereby authorized to establish an account with said bank and to deposit the funds of this corporation therein.
RESOLVED, that any officer, employee, or agent of this corporation be and is authorized to endorse checks, drafts, or other evidence of indebtedness made payable to this corporation, but only for the purpose of deposit.
RESOLVED, that all checks, drafts, and other instruments obligating this corporation to pay money shall be signed on behalf of this corporation by any Officer of this Corporation.
RESOLVED, that said bank be and hereby is authorized to honor and pay all checks and drafts of this corporation signed as provided herein.
RESOLVED, that the authority hereby conferred shall remain in force until revoked by the Board of Directors of this corporation and until written notice of such revocation shall have been received by said bank.
Since there was no further business to come before the meeting, on motion duly made and seconded, the meeting was adjourned.
Dated: this __________Day of _________, 1999
Donald Linzey, Temporary Secretary
Congratulations! You now have a fully operating corporate entity, and are prepared to begin the process of submitting a 501(c)(3) application to the Internal Revenue Service (IRS).
V. Filing for Federal Tax-Exempt, 501(c)(3) Status
Prior to incorporating in Pennsylvania, you should have contacted the IRS at 1-800-TAX-FORM and requested Form 1023 or downloaded the Form from http://www.irs.gov.
The IRS estimates that total form preparation for the 501(c)(3) application will take about twelve (12) hours. It is our experience that most small, non-profit organizations can complete the form in about half that time with the aid of guides such as this one and others that can be purchased.
The Fund has prepared a boilerplate 501(c)(3) application for small organizations that wish to go through the process. Below are the corresponding line numbers to the (c)(3) application and where a non-customized answer is inappropriate, a small note concerning the material that needs to be provided.
Routine process on submission of these applications has been as follows:
1. Submission of 501(c)(3) application to the IRS;
2. A reviewing IRS agent will send you a list of questions about the scope of your activities and any other item that is unclear to the reviewing agent after your application has been processed;
3. Your corporation will respond to these questions within the time allotted by the IRS;
4. Your application, if approval is given by the IRS, will be processed within 120 days from the date of submission;
5. An IRS determination letter will be sent to your organization. This letter should be read carefully as it contains additional information about the type of annual return that must be filed by the organization, and for which taxes, if any, the corporation will be responsible.
Once again, a more detailed explanation of certain items within the 501(c)(3) application can be found either in the IRS publications or in the Non-Profit guide published by Nolo Press, available through Barnes and Noble and other bookstores. The guide below can be used in conjunction with a Legal Defense Fund attorney, who will be available to assist you as you proceed through this process.
The Boilerplate guide to the 501(c)(3) application:
A user fee must be paid with determination letter requests submitted to the IRS. Current costs for user fees are tiered: if your organization does not expect to raise more than $10,000 during each of its first four tax years, it will qualify for a $300 filing fee (for applications postmarked after July 1, 2006). All other corporations must pay a $750 filing fee (for applications postmarked after July 1, 2006).
Part I. Identification of Applicant
Line 1. Name of the Organization
Make sure that the name of the organization that you print is exactly as it appears in your Articles of Incorporation.
Line 2. C/o Name.
Attaching a name to the Application will ensure that mailings between the Internal Revenue Service and the corporation are not misplaced by the post office carrier, who may not realize that the newly formed corporation receives mail at an individual’s address.
Line 3. Mailing Address.
A street and number should be given here for an address, rather than a Post Office Box.
Line 4. Employer Identification Number.
This line requests the Employer Identification Number for the corporation. If you don’t already have an EIN, leave this space blank and the IRS will assign an Employer Identification Number (EIN) automatically to the organization. It is recommended not to apply separately for an EIN as this Application is processing, because the organization may be assigned two different EIN’s.
Line 5. Month that Annual Accounting Period Ends
For most small nonprofit organizations, the accounting period ends at the end of the calendar year, although you can choose any month that fits the needs of the organization.
Line 6. Primary Contact, phone, and fax.
It is essential that the primary contact given in the application is someone intimately involved with the Application process, who understands that he/she may be contacted by the IRS to answer factual and historical questions regarding the submitted Application.
Line 7. Representation by Attorney or Accountant.
Most small nonprofit organizations are not represented by attorneys or accountants, so the appropriate response is probably “no”.
Line 8. Payment of Assistant.
Most small nonprofit organizations would answer “no”.
Line 9. Organization’s Website and E-mail.
Most small nonprofit organizations, newly started, probably don’t have a website for the organization yet. If the organization does have a website, the Applicant should carefully review the website for content that might be incompatible with the Application, as the IRS reviewers will scan the website for any materials or information that contradicts answers given within the Application.
Line 10. Requirement to File Annual Tax Return.
The revenue of most small nonprofit organizations probably won’t rise above the $25,000 annual threshold that triggers the filing of an annual tax return at the federal level. For that reason, the organization might want to check “yes”, and then print “less than $25,000” below the boxes.
Line 11. Date of Incorporation.
This line should be used to enter the date that the Articles of Incorporation were approved by the State. That date will be evidenced by either a stamp on the front of the Articles, or a separate letter that accompanies the Articles.
Line 12. Foreign Country Incorporation.
For most small nonprofit organizations, the answer here will be “no.”
Sign, date, and print name at the bottom in the space provided.
Part II Organizational Structure
Lines 1-4(b). Structure.
Most small nonprofit organizations filing this Application will be a corporation, and will be required to attach a copy of the articles of incorporation with the Application. A small number may be unincorporated associations with Articles of Association or other documents that must be attached for filing.
Line 5. Bylaws Adoption.
Most small nonprofit organizations filing this Application will not have adopted bylaws as of the time of the filing of the Application. If your group has, then you must attach a current copy to the Application and check “yes.”
Part III. Required Provisions in Organizing Document
Lines 1-2(c). Exempt Purposes and Dissolution Purposes.
These lines require you to inform the IRS about where two key provisions reside within your Articles of Incorporation or Articles of Association. The two key provisions deal with the dedication of the organization to exempt purposes and activities; and a legal dedication of assets to exempt purposes and activities following dissolution. If your Articles of Incorporation or Association do not contain these key provisions, you will be required to amend your Articles with the State to include those specific provisions, prior to the processing of your Application.
Part IV. Description of Activities.
Most small nonprofit organizations may not have begun planned activities. Thus, this attachment should be used to outline what activities the organization plans to undertake. Activities should be broken down by category – e.g. “Watershed Monitoring”, “Public Education”, “Administration”, etc. – and a rough outline should be given about how much of the organization’s time will be expended on each of the activities. Explanation here should be detailed and thorough, and the IRS may seek additional information from you if the activities delineated are unclear.
Part V. Compensation for Officers, Directors, Employees, Independent Contractors.
Line 1a. Compensation.
Most small nonprofit organizations will have Directors and Officers, but probably not trustees. Most groups of that nature will not pay their Directors and Officers any compensation for service.
Lines 1b and 1(c). Compensation of Employees and Independent Contractors.
Most small nonprofit organizations will not have employees or independent contracts that are paid in excess of $50,000.
Lines 2a, 2b, and 2c. Business and Family Relationships.
Most small nonprofit organizations may have family relationships that exist among the Board of Directors. If there are no business or family relationships that exist among the Board or Officers of the corporation, check “no.”
Lines 3a and 3b. Work and Duties.
Most small nonprofit organizations will not have listed any compensated independent contractors on the prior part of the Application. Thus, the box would be checked “no.”
Lines 4a, 4b, 4c, 4d, 4e, 4f, and 4g. Compensation Policies.
Most small nonprofit organizations will not have listed any compensation for these identified actors on the prior part of the Application. Thus, the boxes should all be checked “no.”
Lines 5a, 5b, and 5c. Conflict of Interest.
It is generally a good idea to have a conflict of interest policy established either within the bylaws for the corporation or as a separate resolution. Generally, these resolutions require the recusal from voting by any Board member, or any decision by any Officer, for a decision in which that Board member or Officer has a vested financial interest in the decision. The IRS has sample “conflict of interest” policies that can be adopted by the Board of Directors of the organization.
Lines 6a and 6b. Compensation Payments.
Most small nonprofit organizations will answer both of these “no.”
Lines 7a and 7b. Goods and Service Purchasing.
Most small nonprofit organizations will answer both of these “no.”
Lines 8a, 8b, 8c, 8d, 8e, and 8f. Leases, Contracts and Loans.
Most small nonprofit organizations probably won’t have leases, contracts, loans, or other agreements that would fall within the purview of this question.
Lines 9a, 9b, 9c, 9d, 9e, and 9f..Leases, Contracts, and Loans – Interested Organization.
Most small nonprofit organizations probably won’t have leases, contracts, loans, or other agreements that would fall within the purview of this question.
Part VI. Members and Other Benefiting Organizations.
Lines 1a and 1b. Provision of Goods and Services to Individuals and Organizations.
Answers to these two questions will depend on the nature of the nonprofit organization submitting the Application. A soup kitchen, for example, would be providing goods to individuals and perhaps organizations (churches). A watershed association that offers watershed testing to individuals living along a stream may also be defined as providing services to individuals.
Line 2. Limiting Provision of Goods and Services.
Answer this question only if you answered 1a or 1b as “yes.”
Line 3. Benefiting from Provision of Goods and Services.
Most small nonprofit organizations will answer this question as “no.”
Part VII. Your History.
Line 1. Successor.
Most small nonprofit organizations will answer this question as “no.”
Line 2. Time Delay in Submission of Application.
Most small nonprofit organizations, which generally file their Application shortly after incorporation and adoption of bylaws, will easily meet the 27-month guideline established by this question. If the organization does not, a special schedule needs to be completed, which will require the divulging of certain financial information to the IRS.
Part VII. Specific Activities
Line 1. Support for Candidates.
Federally tax-exempt nonprofit organizations are legally prohibited from supporting or opposing particular candidates for any political office. Thus, most organizations answer “no” to this question.
Lines 2a and 2b. Lobbying
Federally tax-exempt nonprofit organizations are allowed to expend monies on lobbying activities – generally defined as expending monies to support or oppose a particular piece of legislation. However, the IRS regulations only allow nonprofit organizations to engage in lobbying if attempts to influence legislation are not a “substantial” part of the activities of the organization. Because most groups are uncomfortable with the IRS defining “substantial” for them, Form 5768 enables an organization to “elect” to comply with a different threshold. That threshold enables a group to generally expend up to 20% of the annual expenditures of the organization on lobbying activities.
Lines 3a, 3b, and 3c. Gaming Activities.
Most small nonprofit organizations will not be involved in gaming or bingo activities. If, however, your group has a gaming license (as required in most States), and wishes to conduct raffles and other gaming activities, you’ll need to provide the IRS with details under this section.
Lines 4a, 4b, 4c, 4d and 4e. Fundraising Activities.
Most small nonprofit organizations will be involved in soliciting for funding through postal mail, e-mail solicitations, personal solicitations, website donations, and foundation grants. Under 4b, most groups will check “no”; under 4c, most groups will check “no”; under 4d, most groups will list only the State in which they actually pursue activities; and under 4e, most groups will check “no.”
Line 5. Governmental Affiliation.
Most small nonprofit organizations will not be affiliated with governmental units, so they would check “no” to that question.
Lines 6a and 6b. Economic Development Activities.
This question is aimed at economic development corporations, or those nonprofit corporations focused on providing affordable housing, or commercial and industrial development. Those groups may qualify under a different subsection of section 501(c) of the Internal Revenue Code. Most groups would check “no” to line 6a.
Lines 7a, 7b, and 7c. Management of Facilities.
Most small nonprofit organizations will answer “no” to lines 7a and 7b, and leave line 7c empty.
Line 8. Joint Ventures
Most small nonprofit groups will answer this line question “no.” Although many groups will be engaged with other 501(c)(3) organizations, this question is focused on ventures with partnerships or other limited liability corporations that have not qualified as nonprofit organizations.
Lines 9a, 9b, 9c, and 9d. Childcare Organization
Most small nonprofit groups form for purposes other than childcare, so checking “no” on line 9a is appropriate. If part of the organization deals with childcare activities, then the group must answer the other line items, which deal with specifics about the operation of those childcare operations.
Line 10. Intellectual Property.
Most small nonprofit groups will answer “no” to this line question. If the nonprofit organization plans to publish pamphlets or books; or pay authors to write for the organization, there may be some intellectual property issues generated with the organization that will require additional information here regarding ownership of the property.
Line 11. Contributions of Real Property and Other Classes of Property.
Most small nonprofit groups, other than those establishing Conservancies to protect and preserve openspace, farmland, and forestland, would answer “no” to this question. If you are establishing a land conservancy, contributions of conservation easements (or development “rights”) will trigger a “yes” to this question, which will then require a copy of the agreement under which conservation easements will be accepted. If the conservancy has not yet begun operation, it is sufficient to provide a general outline of how those contributions will be accepted in the future.
Lines 12a, 12b, 12c, and 12d. Foreign Country Operations
Most small nonprofit groups will answer “no” to line 12a.
Lines 13a, 13b, 13c, 13d, 13e, 13f, and 13g. Grantmaking and Loanmaking to Organizations.
Most small nonprofit groups, newly formed, will not engaged in making grants or loans to other organizations, so the answer would be “no” to line 13a. Groups that would make grants and loans will generally do so to other (c)(3) organizations, an allowable activity under the Internal Revenue Code (IRC). Lines 13b through 13g would then need to be completed, to identify the method and process by which monies are transferred.
Lines 14a, 14b, 14c, 14d, 14e, and 14f. Foreign Organization Grants
Most small nonprofit groups would answer “no” to line 14a.
Line 15. Close Connection to Other Organization.
Most small nonprofit groups would answer “no” to this line, unless the group was part of a larger organization prior to incorporating as a separate entity, and will maintain a financial or operational connection with the larger organization after incorporating as a separate entity.
Line 16. Cooperative Hospital Service Organization.
Most small nonprofit groups would answer “no” to this line.
Line 17. Cooperative Service Organization – Educational Organization.
Most small nonprofit groups would answer “no” to this line.
Line 18. Charitable Risk Pool
Most small nonprofit groups would answer “no” to this line.
Line 19. Operation of School.
Most small nonprofit groups would answer “no” to this line.
Line 20. Hospital and Medical Care.
Most small nonprofit groups would answer “no” to this line.
Line 21. Low-Income Housing.
Most small nonprofit groups would answer “no” to this line.
Line 22. Provision of Scholarships, Loans, and Grants.
Some nonprofit groups, including those established as College scholarship funds, may fall under this category. Establishment of these funds may make the organization a private foundation, and not an organization eligible for (c)(3) status as a religious, charitable, or educational organization.
Part IX. Financial Information
A. Provide a proposed budget for the current year and the next two years. Most small nonprofit organizations will have been in existence less than one year prior to the submission of the Application. The organization will thus be responsible for calculating the current year’s revenues and expenditures; and the revenues and expenditures for the next two fiscal years. For most groups, a “reasonable and good faith” estimate is all that can be required, as most small groups have no idea what types and amounts of revenue they’ll be able to raise for the operation of the organization.
Under the Revenue section:
* list on lines 1 and 2 gifts, grants, and membership fees;
* lines 3-7 are probably not applicable to the small, nonprofit organization;
* line 8 should be used to total lines 1 and 2;
* line 9 should be used for revenue such as ticket sales, book sales, or other revenue that can be deemed to be “related” to the organization’s exempt purpose;
* line 10 should be used to total lines 8 and 9;
* lines 11-12 are probably not applicable to the small, nonprofit organization;
* line 13 should be used to total the revenue.
Under the expenses section:
* fill in line 18, 20, 22, and 23, as those lines will be most relevant to a small, nonprofit organization; line 23 will be used for expenses other than those used for occupancy, salaries and wages, and professional fees;
* lines 14-17 and lines 19, 21, and 23 are probably not applicable to the small, nonprofit organization.
B. Balance Sheet: Most small, nonprofit organizations, newly formed, will have no liabilities or assets, and will be zero at all points. If not zero, line 1 will be used under assets to list cash within a bank account, and lines 17-18 will be used to reflect that cash balance.
Line 19. Substantial Changes in Balance Sheet
Most small, nonprofit organizations will not have experienced a “year end” balance sheet, so most likely, this section will be completed shortly before submission of the Application. Thus, line 19 will generally be answered “no.”
Part X. Public Charity Status
Lines 1a, 1b, 2, 3, and 4. Private Foundation Status.
Most small, nonprofit organizations will qualify as a publicly supported (c)(3) organization, rather than as a private foundation. Private foundations generally operate with a small handful of large donors, and they are required to operate under more stringent rules governing donations, expenditures, and other activities associated with the organization. Most groups will answer “no” to line 1a.
Lines 5a, 5b, 5c, 5d, 5e, 5f, 5g, 5h, and 5i. Public Charity Status
Most small, nonprofit organizations will qualify under 5(g) or 5(h). The main difference between organizations described in 5(g) and 5(h) is that 5(h) organizations expect to receive less than one-third from investment income, and more than one-third from contributions, membership fees, and gross receipts from related, exempt activities. Most small nonprofit organizations elect 5(g) status, as it relies on contributions from other publicly supported organizations, from government grants, or from donations made by the general public.
Lines 6a, and 6b. Definitive and Advance Rulings
Most small, nonprofit organizations, newly formed, request an “advance” ruling. In essence, if the IRS approves the Application, the organization will be treated as a (c)(3) organization for five years, and after that five years, the organization must prove to the IRS that it is a publicly supported organization. Groups that have completed a tax year of at least eight full months can also request a “definitive” ruling. For that ruling to be made, the organization must provide the IRS with certain financial information to enable the agency to determine whether you have met the requirement of public support. Generally, because small groups have not completed such a tax year, and because they usually won’t have the requisite financial information to provide, they elect to pursue an “advance” ruling, which requires them to sign the Consent form provided in this section.
Line 7. Unusual Grants.
Most small, nonprofit organizations will answer “no” to this line question. “Unusual Grants” is a phrase used to refer to large grants not usually received by the organization. The reason to identify such grants as “unusual” is to eliminate them from the equation for determining whether the organization is “publicly supported.” Because most small nonprofit groups will not yet have begun fundraising in earnest by the time of the submission of the Application, they generally will not have received any grants that they wish to deem “unusual.”
Part XI. User Fee Information
User fees will increase for Applications postmarked after July 1, 2006, to $300 (for those groups under the annual $10,000 threshold) and to $750 (for those groups over the annual $10,000 threshold). Most small nonprofit groups will be eligible for the lower fee, and will check the correct box, accordingly, as well as signing and dating this section.
Congratulations! Now you're ready to mail a package to the appropriate IRS processing office. When you've completed Form 1023 (the 501(c)(3) application), place it into an envelope with the following documents.
* One Copy of your Articles of Incorporation, evidencing approval by the State;
* One Copy of your Bylaws;
* Any Attachments included with your Application (which should include the name of the organization and it’s EIN (if already assigned), and the section to which the Attachment refers; and
* A Check for the appropriate amount, made payable to “United States Treasury.”
Send the envelope by certified mail to this address:
Internal Revenue Service
P.O. Box 192
Covington, Kentucky 41012-0192
We advise that you make photocopies of all materials that you send to the IRS, and also that you send the package by certified mail.
VI. Annual Filing Requirements with the State and Federal Government
After submission of the materials above and reception of 501(c)(3) nonprofit status, the corporation will be officially exempt from state and federal taxation on income of the corporation that relates to its exempt purpose. Unrelated income, however, may still be taxable. For example, if a public research organization receives non-profit status, and then holds a booksale to support its purposes, the booksale proceeds may be considered unrelated income and may be taxable. Corporations must be careful about these streams of income.
If your corporation raises or expends over $25,000 in a calendar year, you must file a Form 990 (or Form 990-EZ) with the IRS no later than April of the subsequent year. If you exceed this $25,000 threshold, you are obligated not only to file an annual return with the IRS, but you will be subjected to the jurisdiction of a Pennsylvania agency known as the "Bureau on Charitable Organizations" (BCO). BCO rules require you to register with the agency within thirty (30) days after crossing the $25,000 threshold. For additional information on complying with the BCO or IRS requirements, contact staff counsel at the Legal Defense Fund. Other States may have similar agencies.
So, the good news is that if your organization does not raise over $25,000 in a calendar year, you are under no obligation to file any annual return with any state or federal body. You should maintain your financial records, of course, for other reasons; but an annual return need not be filed with either the BCO or the federal government.
If you raise or spend over the $25,000 threshold, you'll be obligated to file a Form 990 with the federal government for that year of operations and you'll also have to file a separate form (with filing fee) with the BCO, which is located in Harrisburg. The BCO requires you to file a registration form with the agency within thirty (30) days after you exceed the $25,000 limitation.
Emphasis: The BCO has a reputation for a hardline stance towards Pennsylvania non-profits that attempt to avoid these requirements. It is urged that you contact the BCO to receive their materials so that you fully understand what is required from your corporation. The BCO can be reached at either (717) 783-1720 or at (800) 732-0999. The forms are fairly simple to fill out, but the BCO also requires a fee for registration and a copy of your articles, bylaws, and the most recently filed Form 990 annual federal return.
In addition, if you pay employees of the corporation, you'll still be responsible for withholding employment taxes. If you intend on paying employees, it is advised to find a low-cost or pro bono accountant that can do this on the cheap. The other option is simply to pay an individual as an "independent contractor" to do projects for the corporation that are of limited duration. This avoids the payment of employment taxes, but this option can only be used if the individuals are not "employees" as defined by the IRS. To navigate these nuances, it is suggested that a low-cost attorney or accountant may be useful.
Finally, the use of an accounting program such as Quicken can come in useful for keeping expenses and donations to the corporation in one file that can easily be reviewed when it comes time to file an annual report.
VII. Maintaining Charitable Status as a 501(c)(3)
When you receive your IRS determination letter, you will notice that the IRS will be treating you as a 501(c)(3) for a certain period of time (usually five years if you applied for “advance” ruling status), at which time the IRS will review your financial information to determine whether you are receiving enough "public" support to continue to qualify as a 501(c)(3).
Here, it is suggested early on, that the corporation develop a series of small donors who can annually make small donations to the corporation. Small donations from a larger number of individuals from the general public will probably be enough to continue to qualify the organization with the federal government as a 501(c)(3).
VIII. Hooking Into Pennsylvania's Non-Profit Environmental Network
Throughout this process, it is suggested that your corporation work closely with the various entities that have been established as a support network in Pennsylvania. These organizations include the Pennsylvania Environmental Network (PEN), and the Community Environmental Legal Defense Fund (CELDF), which authored this handbook.
More importantly, your corporation may want to join the Pennsylvania Environmental Network (PEN), which consists of a coalition of independently operating environmental organizations in the state. These organizations can provide your corporation with a base of seasoned activists and a foundational support of entities willing to provide technical and legal information either free of charge or at reduced fee costs.
Community Environmental Legal Defense Fund (CELDF)
PO Box 360
Mercersburg, Pennsylvania 17236
In short, welcome to the Pennsylvania grassroots network as a non-profit organization!